Imagine this scenario.
Your neighbourhood house is on fire, and there were helpless children inside the house. Do you run to the fire and save the day or do you run away from the fire thinking it’s none of your problem?
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| Firefighter gene |
The same applies to Investing.
Do you have the firefighter gene of contrarian investing when there are blood on the street or do you invest based on following the crowds favorite?
If you are one of those who choose the latter, then it is most likely that you are paying a dear price premium to what their intrinsic values them for. This could be exemplified by the increasing price to earnings ratio over time, indicating market future expectations that have been priced into the market price. In addition, these are stocks which are usually equally loved by analysts as they attempt to recalculate and price in higher growth expectations into their financial model, coming out with higher target price, leading mostly clueless investors who read it at face value who take them for granted. When the company announces quarterly results that disappoints or not up to expectations, the stock price can fall quicker than the meteor.
A good example in the local market context would be Osim, whose share price went horribly wrong recently due to disappointing quarter results. This is a counter which has for 22 consecutive quarters reported increase both topline and bottomline. There has been countless re-ratings from analysts who set higher target price each time and because of its multi-bagger popularity, its price has gone up faster than its earnings. Those who bought them a few years ago would be sitting with plenty margin of safety, but think of those who entered at a high.
The same goes last year in 2013 for Reits. Due to the low interest rate environment, Reits have been in hot demand for investors who are chasing for yield. I remember some of the Reit counters such as PLife Reit went up as high as $2.80, and FCT went up as high as $2.32. The average yield rate for Reits compressed to about 5.7%, and the spread with risk free rate SGS bonds were getting very close. These are times when there are extreme euphoria for such demand, and it is only a matter of time before the bubble burst. True enough, they massively corrected not long after the US is signaling the end of QE.
Firefighter Contrarian
On the other hand, Contrarians, as the name implies, try to do the opposite of the crowd. They sniff at opportunities when a good company takes a dip but unwarranted drop in the share price. It takes more than just guts investing as Contrarians. In fact, a full scale planning in advance is necessary in order to succeed. You will go against the tide of the analysts’ reports, and many of your friends who have done the opposite. You need the mental toughness to prepare yourself for a cut-loss strategy should your judgment is wrong.
A good example in the local market context would be China Merchant Pacific (CMP). This is a counter that does not have wide analysts coverage and local investors tend to shy away due its connection with being an S-chips. Having said that, a closer look at the company and you would see how the management have transformed this company into a real solid dividend growth company in recent years by making solid acquisitions that contribute to the earnings. This is a company which gives around 7.5% yield and a payout ratio of about 70-75% at fully diluted EPS. Recently, there has been more liquidity and this counter has started attracting some of the local investors into the scene, so we’ll see if this becomes the next growth story in the future.
There isn’t a sure way win for investing but the contrarian way of investing is one of the best strategies for achieving great returns over time. A contrarian view of investing is also advocated by many great investors we had.
Warren Buffett
“Be fearful when others are greedy and be greedy when others are fearful”
Baron Rothschild
“Buy when there’s blood on the streets, even if some of the blood is yours”
Sir John Templeton
“To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit”
“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell”
George Soros
“The worse a situation becomes the less it takes to turn it around, the bigger the upside”
Arthur Cutten
“Being a contrarian requires a superior sense of what is real, and what is out of synch with reality. In general, few amateurs possess this level of judgement and perspective, and end up just looking silly and eccentric after a few correct calls, taking the opposite position because it is the opposite, proclaiming night to be day, and the moon to be cheese”
Thanks for reading. I’m vested at FCT and CMP as of writing.
Do you have the firefighter gene when you invest?
Osim has been an excellent example of multi-bagger stock quoting by our local value investing authors and bloggers. Right?
Hi Uncle CW
Yes Osim has been a darling for years, maybe it will be again if it manages to bounce back.
Osim not olam.
Same same but different 🙂
Nice post.
CM Pacific aims to boost up dividend, stir price up and then can call rights issue. Typical China company strategy. You see this happen all the time in Shanghai and HK. DBS and Normura recommended buy at same time makes it more suspicious. It indeed went up last Friday.
Hi Richard
Thanks for your comments.
That could be in one of their agenda. As long as im in the ride from the start, I dont mind the ride on its way up 🙂
High dividend yields are usually high for some unsavoury reasons. CMP has tonnes of convertible bonds still outstanding. This overhang stopped me from plonking down my $.
Hi EH
Thanks for commenting your thoughts.
The payout I mentioned above in inclusive of fully diluted convertible bonds so even with dilution they are still able to pay out 7% dividend at 70% payout ratio.
Nice post! it seems logical to be a "firefighter" but first we need to "fight" against our own emotional state and detach from it as far as possible 😉
Hi Richard
Firefighter is a very noble job just like doctors and policeman.
Too be honest, despite knowing they are a noble job not many are willing to take the role.
It needs something special to assume the role 🙂
Very good read, i liked all the famous quotes.
CMP seems very popular now, especially on Value Buddy forum. Valuations looks cheap but I kinda avoid it because I don't fully understand it and also its a S-Chip. Main worries of it would be future dilution, from the existing convertible bonds and a also the potential rights issue down the road for acquisitions. There are actually many similiar toll road companies traded on HKex and SHex that are much cheaper, mostly selling for 5-8 times earnings and 0.5-0.8 price to book only.
I would definitely like FCT a lot more, a solid dividend counter for long term holding! Lower yield is fine, at least got peace of mind since it has a good track record and recognized management team.
Cheers
just as an example
http://www.bloomberg.com/quote/CMH:SP
CMP now trading at 6.7 times earnings, 0.96 PB
http://www.bloomberg.com/quote/107:HK
107HK is trading at 7 times earnings, 0.7 price to book
http://www.bloomberg.com/quote/548:HK
548HK trading at 5 times earnings, 0.87 PB
I think there are over 20+ such infrastructure companies listed in HK & Shanghai, I am not familiar with all of them but a serious value investor should be able to find many bargains a much cheaper valuations than CMP. Just that value buddy forum has too many biased posts such as green giraffe that keeps promoting CMP as his "core holdings"
Hi Felix
Thanks for your valuable contributions as always.
For some reason, companies listed in HK and China always seem to trade at attractive valuations. Just look at those bluechip at hk index. Bank of china and the rest of the banks are trading at only 5x pe. Compared to singapore they are much more expensive. So I can understand why cmp at 7x is not considered too cheap. You are right.
I understand there has been many positive and negative sentiments recently regarding this counter. To be honest I only take them as my news and infos, not decision.
As part of my decision process that compliments my dividend investing strategy, I typically look at the cash flow generating capability and payout ratio as my most important factor. The yield of 7% is a bonus. To me, they seem to be holding on well on all these 3 fronts factors, even at fully diluted eps. When these change, I might need to consider my options again.
Hi B, I am vested with CMPH too.
The CB dilution will bring with it cash, and it is unlikely that the cash will stay idle, so the dilution should be temporary with yeild accretive acquisition.
But even if they do not do acquisitions, the dilution should not cause yield to fall below 6% assuming zero growth
Hi Sillyinvestor
You are right.
Probably not many people see the benefits of doing the convertibles other than the dilution. I think there are much more than meets the eye 😉
Hi B, what do you think of sia engineering ? Do you see their sharp decline in profit will be a permanent trend ?
Hi Betta man
Apologies for the late reply.
I see the core business for SIAEN as a potential structual slowdown which might impact future earnings.
The past 2 quarters havr been pretty bad and it appears.now that dividend is most likely reduced to around 18 cents or less based on full payout.
If we were to be conservative, I would want to see price drops further more to provide a sufficient margin of safety for the stock to yield at least 4%. $3.40 is probably the key to watch out for.
Hi B,
All these quotes are half correct and pretty misguided.
For one to profit during bear market or when there are blood on the street or during pessimism, you must hold tons of cash sitting idling in the banks even during good times which are eroded by inflation.
MS
Hi MS
Yes cash is an asset in itself and does provide some good value when things happen e.g emergency, opportunities etc. So you are right in that sense.